Basic Elements in Measuring E-Mini Market Strength

There are very few e-mini trading sources that don’t, at some point, emphasize the importance of trading with the trend. This article is no different; I highly recommend focusing on trading with the trend. However, not all trends are created equal and every trend begins to falter and finally reverse. Obviously, the best time to be trading the trend is when it is peaking and not when it is declining and strength.

But how do you know when and e-mini trend is especially strong and when it is entering a weak phase?

Interestingly enough, I generally show a high level of disdain for indicators and oscillators as primary tools for entering and exiting e-mini trades. On the other hand, indicators and oscillators are especially useful in developing an understanding of the underlying strength of a trend. As a trend lengthens, I tend to look to my indicators to see if there are any divergences in trend indications and price movement. For example, if the price has been rising in a trend and been confirmed throughout the course of the trend but began to show divergence (divergence would be an oscillator moving in a direction opposite the price movement, in this case) I start to become suspicious about the strength of the trend. While divergence signals may not point to the exact bar where the trend will in end, it should put any competent trader on notice that the trend is weakening.

When divergences begin to develop, there are two possible outcomes; the trend will resume in direction and strength or the trend will continue to falter and decay. Of course, repeated divergences in succession and on different indicators or oscillators would certainly put me on notice that the possibility for a trend change could be in the offing.

Additionally, I think it is important to keep an eye on volume during a trend. When I see a marked change in volume, especially with an increase in volume, my suspicions become even more pronounced.

A simple observation of the price action as the trend progresses can also yield significant clues as to the strength of a trend. Usually the end of a trend is marked by ragged price action and deeper retracements. You will often see the divergence of price action and an indicator as the price action becomes more ragged. A trend line will emphasize the weakening price movement, especially when the retracements stop at closer and closer intervals to the trend line, or temporarily violate the trend line.

As you can see, there is no single factor that I use in determining the strength of a trend line. I use a constellation of factors that relate similar information to determine the underlying strength of a market trend.

In summary, we have had a very brief look at market strength and trends and identified some factors that may indicate the weakening of a trend. Those factors are divergent indications, volume fluctuations, and erratic price action. Once the directional movement has slowed it may form a channel or reverse direction. Only observation will give you, as the trader, the proper information on which to act. Don’t trust any one indication of a weakening trend, but look for concerted indications of a change in price direction.